China is finally facing reality

Zhou Xiaochuan, the head of China's central bank,
the People's Bank of China, rarely makes public statements.

But with the country's economy slowing down and driving
significant volatility in global markets, and with G-20 world
leaders meeting in Shanghai, he made a speech.

Most of his comments echoed past statements. But there was one
significant language shift that should change how people talk
about the Chinese economy going forward.

He said monetary policy would be "prudent with a slight
easing bias." He also said the economy had more room for easing
going forward.

This is key. The Chinese economy is going through the
difficult transition from one based on investment to one based on
consumer consumption. To get it done, though, the country will
have to improve productivity and restructure massive companies
with a lot of debt — companies in industries like property and
manufacturing that used to drive the economy.

Of course, as this is happening, the government doesn't
want a load of jobless people. It doesn't want credit
events.

So while the government has talked a lot about reform, not much
has happened yet. The government has talked about bankruptcy
policy, it has talked about reducing excess capacity at
debt-laden companies, and it has talked about getting Chinese
people to move into empty buildings in third- and fourth-tier
cities.

But it hasn't happened yet, because doing that right now would be
too painful.

Keep it going no matter what

China instead has been turning on the spigots to keep money
flowing through the economy. It has made it easier for people to
buy cars, and it has cut interest rates. It is making money easy,
and the same debt-laden corporations that China is trying to
delever are just raising more debt in the country's
booming corporate bond market.

Finally, Zhou is acknowledging this dissonance.

After the speech, Bloomberg economist Tom Orlik wrote in a
note that while it was "an important rhetorical
shift, in fact the language is now just catching up with the
reality: policy has had an easing bias since mid-2015."

This is the first time the government has acknowledged that it is
trying and must keep working at it. That means really painful
reforms will have to wait until this ship is steady.